In a draft circular sent to the banks across India, the Reserve Bank of India (RBI), has said that it would be replacing the existing bank rate system (BPLR) with a new Base Rate System. The new system will come to play from the next fiscal.

As per the new system, the banks will now have to decide on their interest rates based on the Base Rate. RBI in the circular said that the banks will be allowed to decide on their own Base Rate. The criterion for deciding the same would be determined by a host of factors - CRR, SLR, unalloctable overhead cost of banks, cost of deposits, fees given to directors and auditors, expenses due to legal requirements, administrative expenses, IT costs and cost due to profit margins and towards deposit insurance.

The lending rates of the banks would be calculated by adding Base Rate plus the borrower specific charges.

Meanwhile, there is a tussle going on between the RBI and the banks regarding the home loan rates. RBI has also said that it is concerned about the teaser rates that are offered by the banks.